Consumers fight the inflation dragon with blunt sword of debt

16 Aug 2023

Although consumers undoubtedly sighed with relief when the South African Reserve Bank put a brake on the increasing interest rates in July, it was not much of a reprieve for debt-ridden South Africans.

The DebtBusters Debt Index for the second quarter of this year reveals that financially burdened consumers have been relying on personal loans over the past seven years, while debt-to-income ratios for top-income earners are at all-time highs.

The findings, drawn from a quarterly review of debt-counselling applications, paint a sober picture of a nation struggling to cope with a cost-of-living crisis and little relief in sight.

Benay Sager, head of DebtBusters, says the collective impact of the 10 successive interest-rate increases since November 2021, along with rising inflation, is evident in the data.

“Average loan size has increased by 78% since 2016, and 95% of consumers who applied for debt counselling during the second quarter of 2023 had a personal loan.

“Unsecured debt was on average 26% higher than in 2016 and 39% up for those taking home R20,000 or more a month. It is abundantly clear that consumers are using unsecured credit to supplement their income.”

The latest Altron FinTech Household Resilience Index, which provides more clarity on the financial disposition of households and their ability to cope with debt, showed that household financial resilience declined by 2.4% in the first quarter of this year, compared with the last quarter of last year, and by 1.8% year-on-year with South African households now worse off than pre-Covid.

On total remuneration levels in the economy, the report indicated that average monthly remuneration in South Africa declined by 10.7% in real terms year-on-year.

Inflation cuts spending power by 38%

Although high interest rates have pushed debt repayment costs up significantly, inflation has been the real dragon at the door.

Sager points out that nominal incomes are a mere 1% higher than in 2016, and cumulative inflation growth of 39% over the past seven years means that, in real terms, people’s spending power has diminished by 38%.

One consequence is that consumers are spending more of their income on servicing debt – on average 66%. Those who are taking home more than R20,000 per month have a debt-to-income ratio of 150%, while the ratio for those taking home R35,000 or more is 189%.

These ratios are the highest they have been since DebtBusters began analysing debt-counselling applicants’ data in 2016.

Headline inflation eased back into the 3% to 6% target range for the first time in months, coming in at 5.4% in June this year – which is largely why the SA Reserve Bank (Sarb) held back on another interest rate increase in July.

Absa economist Miyelani Maluleke says the bank expects headline inflation to ease further, reaching 5% by December this year and averaging 4.8% next year, partly driven by further moderation in food and core inflation.

“With inflation expected to fall further, additional rate hikes seem unlikely unless there is a big adverse inflation shock. We expect the Sarb to cut rates from March next year.

“However, with global interest rates likely to remain higher for longer, and South Africa gradually becoming a riskier investment amid weak growth and deteriorating public finances, we now expect a repo rate of 7.5% (in the longer term) compared with our previous forecast of 7%,” he says. DM

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Inflation cuts spending power by 38%